Appeals court denies taxpayers’ attempt to revoke NOL election

The Eleventh Circuit affirmed the judgment of the Tax Court to disallow married taxpayers’ revocation of their election to forgo the carryback of a net operating loss (NOL).

Facts: The taxpayers incurred an NOL for their 2014 tax year, for which they filed an election under Sec. 172(b)(3) to irrevocably waive the two-year carryback of the loss. The IRS subsequently filed a notice of deficiency against the taxpayers for years 2011 through 2013 after discovering errors on the taxpayers’ returns. The Service also did not permit the taxpayers to carry back their NOL from 2014, citing the election to waive the carryback. The taxpayers sued in Tax Court, where the court granted the IRS’s motion for summary judgment.

The taxpayers, Javon and Vita Bea, were partners in an investment partnership. The partnership sustained significant tax losses in 2013 and 2014. The Beas engaged a professional tax preparer to prepare their joint individual tax returns for the years 2011—2014. The tax preparer also prepared the investment partnership’s tax return. The tax preparer made significant errors on both the partnership’s and the Beas’ individual returns.

The tax preparer erroneously overstated the 2013 partnership loss that flowed through to the Beas by nearly $4.7 million. The Beas then carried back the 2013 loss to claim refunds for tax years 2011 and 2012. The tax preparer then, believing that the 2013 loss fully offset all taxable income from 2011 and 2012, prepared the Beas’ 2014 tax return with the election under Sec. 172(b)(3)to irrevocably waive the two-year carryback of that NOL. The tax preparer allegedly did not consult the Beas about the election.

The IRS examined the Beas’ tax returns for the years 2011 through 2014 and discovered the overstated loss from 2013. This resulted in a tax deficiency for 2011 and 2012, for which the IRS issued a notice of deficiency in 2017. The Beas then sought to carry back their 2014 loss to 2012, but the IRS disallowed the carryback.

The taxpayers challenged the IRS’s disallowance of their revocation of the Sec. 172(b)(3) election. The parties filed a joint stipulation of facts and a cross-motion for summary judgment. The Beas cited “additional material facts” regarding their ignorance of the election that they argued justified revoking it.

The Tax Court granted the IRS’s motion for summary judgment, finding the Beas’ “additional material facts” irrelevant and immaterial because their signed 2014 tax return contained the explicit, irrevocable election to waive the NOL carryback period, and there was nothing in the statute or regulations to suggest that taxpayer knowledge might affect the revocability of that election.

Issues: The principal issue was whether the taxpayers could revoke a previously made election under Sec. 172(b)(3) when they lacked knowledge of making the election.

Holding: The Eleventh Circuit affirmed the Tax Court’s decision. Pursuant to Temp. Regs. Sec. 301.9100-12T, “such election, once made for any taxable year, shall be irrevocable for such tax year.” According to the court, the Tax Court correctly found nothing in the statute that requires the IRS or the courts to consider a taxpayer’s subjective intent. The taxpayers signed the tax return with the irrevocable election to waive the NOL carryback, making their lack of knowledge of the election irrelevant.

• Bea, No. 18-10511 (11th Cir. 1/31/19)

— By Mark A. McCoon, CPA, CGMA, Ph.D., associate professor, University of Wisconsin—Superior.